Trusts: Questions and Answers

What is a Trust?

A Trust is a legal relationship created at the direction of an individual in which one or more persons known as the Trustees hold his assets for the benefit of others. It is usual that the beneficiaries of the Trust will be the children and/or the grandchildren of the person establishing the Trust. The assets within the Trust will usually be property, money or investments.

A person can create a Trust during his lifetime. This is called a Lifetime Trust. He can also create a Trust in his Will which will come into effect upon his death. This is called a Will Trust.

What types of Trusts are there?

The most common trusts which are used in practice are an Interest in Possession Trust or a Discretionary Trust.

An Interest in Possession Trust is where a beneficiary is entitled to the immediate enjoyment of the right in or over the Trust Property. It is normal for the beneficiary to receive an income from the Trust for life in this instance.

A Discretionary Trust exists where the Trustees have the discretion over the distribution of the income and capital assets within the Trust. No beneficiary has the right to require the Trustees to exercise their discretion in his or her favour. This means that a class of beneficiaries exists from which any may be chosen to benefit. It is entirely at the discretion of the Trustees.

Why make a Lifetime Trust?

The reasons for establishing a Lifetime Trust can be different for each person. However, the most common reasons are as follows:

To save paying Inheritance Tax. A person can place assets into a Trust in order to save paying Inheritance Tax. It is usual in the circumstances to place assets into the Trust that are worth less than the Inheritance Tax Nil Rate Band. This is £325,000 in the present financial year. The assets in the Trust will not form part of his estate if he lives for a period of seven years from establishing the Trust.

To protect the family assets. A person might have established a successful business. He might consider it appropriate to place the shares in the Company into a Trust. The Trustees of the Trust will be responsible for the control of the shareholding and not say the children of the person creating the Trust. He might consider that they are not responsible enough to have control of the shares in the Company.

Long term care planning. This is where a person places the assets into a Trust in order to protect them from being taken into account in the financial assessment if they were required to go into a residential home or nursing home at some stage in the future. It is normally a case of looking to protect the family home from being used to fund care fees.

To place the assets into a Trust but to retain control of them during his or her lifetime. This is where the person making the Trust will remain as one of the Trustees of the trust.

Why make a Trust in a Will?

The most common reasons for establishing a Trust in a Will are as follows:

To protect family assets. This is particularly relevant in relation to the funding of long term care if the surviving spouse were to go into care. It will ensure that assets within the Trust are not taken into account in any financial assessment of the surviving spouse.

To control the ultimate destination of the assets owned by the person making the Will. This is particularly relevant if the surviving spouse were to fall out with the children and changes their Will or if they were to remarry.

To ensure assets are protected if there is a second marriage. A Trust is often the most appropriate structure to use in order for the person to strike a balance between the interests of his spouse and his children from a previous marriage.

To protect the assets from children who they think are financially irresponsible or whose circumstances are such that it would be inappropriate for them to inherit any assets direct.